Friday, February 27, 2009

Putting the market in perspective

In overheard conversations, I sometimes hear someone say they’d like to take all of their money out of the market or their retirement fund or even their bank and bury it in the backyard, or perhaps tuck it under the mattress. I get the sense that while they’re laughing, they’re not all that far from being serious.
We’re seeing some serious panic now among consumers, many of whom haven’t seen a big recession in some time. It’s to that end that the Family Investment Center invited B.D. Horton, a certified financial planner and certified public accountant who is Vice President of Territory Sales for American Century Investments, to speak to our friends and clients. Horton is a smart guy who works for a well-respected company, and we think highly of him. As we thought he would, he gave some terrific perspective for the financial crisis we’re now in.
First, he traced the roots of the crisis. We got here because of many falters in the financial system, but the primary driver of the recession is the sub-prime mortgage mess. As I think most folks know by now, financial institutions routinely loaned money when they should not have to people who clearly didn’t have the means to pay it back. In many cases, the cards were stacked against them. Interest-only loans that never allow someone to build any real equity in their home and loans that require gigantic balloon payments after a few years were going to work in very rare instances. It was a system that was designed to fail. On top of that, mortgage-based securities put investments at risk when those mortgages failed. There were also all other types of credit problems that really are tediously distracting, so we won’t get into those here.
What really grabbed my attention was the next slide Horton showed us. This looked at the length of recessions in months, going back to 1945. The most recent recession was in 2001, and lasted eight months. The two lengthiest recessions were in the early 1980s and the mid-1970s. Psychologically, that makes this recession tough for many to stomach. If you do the math, many of today’s late 30s to 40-year-olds were only born in the late 1960s to early 1970s. They’ve never managed money inside of a recession. So to them, this is particularly terrifying.
Horton traced his way through the many things that have happened inside our current recession. It’s just about too depressing to repeat. So let’s not. Instead, let’s get right to why he’s optimistic about the recession of 2009. Horton’s research shows that when a bear market ends, the rebound is steep and plentiful. Within one year of the end of a bear market, the stock market has been up, on average, 36 percent. In examining consumer confidence, he showed that at nearly every point when the level has dipped low, as it has now, it begins to rebound.
The average bear market runs about one-fifth in length of the average bull market. Further, the average bull market grows by over 100 percent, while the average bear loses a third of that. So, by the averages, it makes sense to wait out the bears to profit from the bulls.
It can be tempting to try and time the market by pulling money out and putting it back in when it is at the lowest point. But be careful. Horton told us that for the 20-year period ending December 31, 2007, the S&P 500 has an average annual return of 11.8 percent. The average equity investor has a return of just 4.3 percent annually during that same 20-year period, or only about one-third of the average annual return of the S&P 500. Think about the long-term average – the life of the investment, not the short-term. Look at what it’s done in 10 years, not 10 months.Horton noted that the time of greatest opportunity is often right about now. Stock is on sale – the question is always which stock, and how much is it really worth? That’s the million dollar question, meaning if I knew that, I’d be the next Warren Buffet. Stick to the principles that have long-guided you in investing. Remember, there is always risk to investing. Set your goals, and work towards them.
I'd love to hear from you - what are your plans for your investments? Have you pulled out of the market? Are you thinking about it? Are you buying?

The return of haggling

Lee Eisenberg is a terrific writer - smart and entertaining. Here's a great post he had today on The Daily Beast in which he talks about an increase in haggling. It's an interesting idea. I'd love for you to post comments here about haggling. Do you haggle? If so, are you often successful? Tell me about the great deals you've gotten through haggling.
Here's the post:

Monday, February 23, 2009

Want to put the markets in perspective? This is your chance

We're hosting what promises to be a terrific, informative event later this week at the East Hills library in St. Joseph. If you want to look at the larger picture, you won't get much better than the expertise offered at American Century. Here's our press release about the event.
Event set for Thursday
Investors have spent the past year watching the markets fall and worry about their future, or current, retirements. American Century Investments is ready to help investors try to make sense of the market’s downfall and put it into perspective.
Family Investment Center is providing an evening of educational enrichment for investors this week that will present a knowledgeable and intelligent take on the markets. The program will be presented by B.D. Horton, a certified financial planner and certified public accountant who is Vice President of Territory Sales for American Century Investments. He has been in the financial services industry for more than 10 years.
The presentation topic will be “Putting Today’s Market in Perspective.” The presentation will take place on February 26, 2009 at the St. Joseph, Mo., East Hills Library, 502 N. Woodbine Road, in the Basement Auditorium. Refreshments will be available at 6:30 p.m. and the presentation will begin at 7 p.m.
B.D. brings a unique and fresh perspective that his clients appreciate and enjoy as he works with them to accomplish their goals.
For more information about this event, please call the Family Investment Center at (816) 233-4100.

Advice for those in debt

I have recently started offering commentary and financial advice on the Web site, which provides advice for men who are going through the divorce process or who are divorced. Money can be one of the trickiest issues for anyone to manage. It is an emotional issue, at times, as is divorce, and the two intertwined can be extremely confusing. In this segment, I discuss managing debt in a way that I hope is easy to follow. It's solid advice for anyone - not just a man going through a divorce. You can watch it here:

Thursday, February 19, 2009

Bond market presents challenge to conservative investors

The Fixed Income Challenge

One of the biggest challenges in the markets today comes from an unlikely source – bonds. Traditionally, bonds are the boring part of a portfolio, generating a bit of interest income while offsetting volatility from stocks.

Bonds run the gamut from extremely safe to highly speculative. For most portfolios, we recommend safe bonds with shorter maturity dates. We often use managed bond funds for added diversity and expertise. At different times, we might use bond substitutes - bank certificates or commercial money market funds - in this portfolio segment. These are rarely a good long-term solution, however.

Rates have fallen to ridiculous levels. Treasury bonds – often considered the safest investment of all – are paying less than one percent. Money market funds, comprised of the shortest possible maturities, slipped into that range as well. Obviously, it’s hard to stomach a large portfolio segment locked into such dismal annual returns.

And, yet, what’s the alternative?

There are genuine dangers in reaching out for higher rates. With bonds, higher rates come directly from higher risks. You either extend maturities or seek lower-rated bonds. Lower-rated bonds carry some risk of default (especially in today’s environment), and longer bonds will suffer when rates eventually rise again. It might pay to speculate in those arenas, but it’s too dangerous for large amounts or most of our clients.

No simple solutions

In some ways, the bond market is more complex than the stock market. First of all, there are tens of thousands of issuers. Virtually every level of government from Washington, D.C. to the sewer districts of rural Missouri creates and sells bonds. School districts, universities, and library systems, along with thousands of corporations and churches, issue bonds.

The terms of those bonds differ from issuer to issuer. The stated interest rates, payment schedules, and maturity from the very same issuer can range from six months to 30 years. There are insured bonds, uninsured bonds, revenue bonds, and general obligation bonds.
Navigating these treacherous waters requires a sure and steady hand, with considerable experience and understanding. Multiple bond variables – issuer, maturity, credit quality, and type of bond or deposit – interact with the extreme economic environment in unique and peculiar ways. The 2008 “Credit Crunch” was largely the result of some widespread peculiar pricing anomalies with mortgage-backed bonds.

Because of all of these variables, we’ve been recommending bond funds to our clients. Bond funds, when run by experience managers, give the same advantages as a stock mutual fund. No one investment can tank the fund if it is properly diversified.

If you’re looking at bond funds, examine the track record of the funds against the track record of bond indexes. Look at the quality of the firm and the length of employment of its management. And know, that like everything else, there are no guarantees. There are no silver bullets, especially in this market.

Some final points to consider

One knock against bond mutual funds is that they never mature. A fund manager either trades the bonds or reinvests the proceeds when they mature. Some folks prefer the simplicity of a single bond with a guaranteed maturity. It is simpler to use that approach, but it’s a limited solution with limited investment potential.

Bond funds offer a couple of advantages. Trading and pricing costs born by individuals are often two to three times higher than institutions. Also, diversification offers more safety, especially with corporate, municipal, or high-yield bonds.

One last observation seems important. There are some unusual moments where bank deposits (certificates or even demand accounts) yield more than bonds. In some cases, that may be true today. Pay special attention to FDIC coverage limits because high promotional rates may signal a bank’s need for capital. Such opportunities may bring brief periods of profitability, but rarely offer a good longer-term solution.
Dan Danford is founder and CEO of Family Investment Center in St. Joseph, Mis­souri. The firm is a commission-free investment advisor registered with the SEC. Danford and other advisors at the firm specialize in managing large portfolios of traditional investments. They do, however, advise investors on a broad range of financial services. More about Danford and this unique firm can be found at Also, the firm’s family finance blog is found at Follow Dan on Twitter @family_finances.

Thursday, February 12, 2009

How much does it take for you to be secure?

Colleague Lee Eisenberg wrote a book several years ago called The Number. The concept was how much would it take for you to be able to pursue your dream, walk away from a horrible job or retire early? He has revisited this topic in an interesting column for Portfolio. I'm quoted, which is nice, but more importantly, it has some great interactive tools that allow you to take a look at what your comfort level is with money.
You can read it here:
Tell me what you think about this article in the comments section. What will it take for you to be comfortable?

Monday, February 9, 2009

Medical Economics publishes article on flexible retirement planning

Medical Economics magazine, one of the top publications for physicians, named the Family Investment Center to its list of top financial planners for doctors. This is at least in part because of our fee-only structure that is more customer-friendly, and doesn't bias us in favor of any one company or product. We're proud of this award, and followed up that success by Dan penning a column about the need for flexibility in planning. We've excerpted part of that column below, and linked to the full article on the Medical Economics home page if you'd like to read the entire article. It applies far beyond physicians. Everyone needs a flexible retirement plan that can change with their needs. Read on below.

The post-war baby boom has become the post-millennium retirement boom. Grandma and Grandpa put all their savings in bank certificates, and that was probably OK when the typical retirement lasted 5 or 10 years. Today’s prospective retiree, however, faces different challenges and a broad array of products and ideas.

Think back on the past 30 years: How much change have you endured? Family. Friends. Profession. Geography. Technology.

Would you be content living on the same salary you earned in 1979? The same car? The same house? Now gaze ahead to 2039. Are you willing to lock in financial solutions today? Even the best products in today’s marketplace are likely to evolveduring the next three decades.
Read the entire article here:

Sunday, February 8, 2009

A completely different way to think about real estate

Due to the downturn in the real estate market, many people who have long wanted to buy their first home or invest in real estate are wondering if they’ll ever get to fulfill that dream. But I want to encourage you to think of it in a different way: real estate is on sale. If you don’t have to sell a house to get into another one, this is a great time to buy.

Prices on real estate are lower than they have been in quite some time, and bargains are available. I just purchased a condominium for a second home after finding the market rich with property and opportunity.

I’m not a Realtor® and I’m not in the mortgage or lending business. Our firm specializes in managing traditional investment portfolios. But we help a lot of people with overall planning and investing and it would be a mistake to overlook financial opportunities in other arenas. Now looks like a pretty good time to buy a house for people with money to spend or solid credit.

The magic of real estate borrowing

Buying a house is one of few nice financial leveraging opportunities that comes to a family. Think about it; you borrow at a low interest rate and pay it off monthly over a long period of time. Every payment reduces the loan’s principal amount, and pays tax-deductible interest to the lender.

At the same time, property usually goes up in value. Maybe not month-to-month or year-to-year, but it’s fairly reliable over longer periods. To get a sense of this, print a mortgage amortization schedule and look at the reduced principal value in 2019. Now, estimate the likely value of the property ten years hence. That future equity was enhanced by a low interest loan and subsidized by Federal tax laws.

It’s also comforting to note that future payments – while locked in with a conventional loan – will seem smaller in a decade as inflation shrinks the value of dollars and as your family income rises.
It’s not genuine magic, but a mortgage is as close as you’ll get in personal finance. In fact, I recommend to most folks that they take the longest term possible, and resist the urge to pay off early. The low payments add flexibility to your situation, and extra money can often be invested more profitable elsewhere.

First-time homebuyers might find that the zero-down or interest-only loans of yesterday are no longer available. But traditional loans, which call for a down payment, are available, even plentiful, with low rates. Traditional homebuyers who want a starter house, and have decent credit, can start shopping now.

Fewer bad loans is really good news

It is really good news that those riskier loans are gone. In the long run, that type of lending was not doing consumers any favors, and many of those people who were given interest-only or zero down payment loans have lost their houses. Today’s consumer will just need to understand that lending practices are more conservative, and be prepared for the new realities.

Baby boomers seeking a second home, perhaps in a resort or near a lake, may find this is an ideal time to invest in that second house, or income-producing rental property. Investing in real estate may be one way to help bolster plans for retirement.

Investors need not choose between a second home and saving for retirement – investing in real estate can be one tool to help achieve both dreams. That real estate investment could appreciate as much or even more than other types of traditional investment, especially if you buy it at a bargain price. So start shopping. But as always, don’t jump too quickly. Examine all of your options in terms of property and loans available. The purchase of a home, including a second home, could become a solid step towards planning your future.

Thursday, February 5, 2009

The 60-minute family finance makeover

What can I do to improve my situation quickly? A great question. I've outlined the steps everyone should take below.

Consolidate similar accounts. One reason families fail financially is because they are overwhelmed by monthly papers and statements. It might take a few minutes, but transferring all IRA accounts to the same place makes it much easier to follow each month. The same with other accounts. Find a convenient place where you can consolidate all your mutual funds, stocks, bonds, and bank certificates.

Simplify your investment process. Simple is good. For most families, a diversified portfolio of good mutual funds will earn solid results without all the bother and fees. A few investment hobbyists love the complexity. Most people, though, benefit from the simplest possible approach. Eliminate clutter and confusion.

Tune out “market pornography.” You’ll be happier and more successful if you ignore market clutter. Almost everyone agrees that a long-term investment approach works best for most people. Yet, we’re smothered by minute-to-minute coverage of all the markets. Just skip it completely. Enjoy life without the daily noise.

Study a good investment book. An hour reading the right book can change your financial life forever. Try Ric Edelman’s “Ordinary People, Extraordinary Wealth” or Andrew Tobias’s “The Only Investment Guide You’ll Ever Need” or Jonathan Clements’s “25 Myths You’ve Got to Avoid If You Want to Manage Your Money Right.”
Our book, “Million Dollar Management: Simple Lessons to Use Wealth Management Principles for your Family Investments” is an easy-to-read explanation of investment things that really work. Learn the basics, and you’ll succeed.

Create a simple filing system. People hate all the paper, and who can blame them? It all seems important, but it’s not. Keep a temporary file for each account, then empty it and start over after tax time each year. You accountant can help decide what’s necessary. A simple system helps reduce monthly paralysis and anxiety.

Meet with a qualified, commission-free financial advisor. Most quality advisors offer an initial meeting for a reasonable price. Bring your investment statements and a list of questions, and they’ll offer immediate insights and advice. Many families I meet with don’t need a second meeting because we can answer their most pressing questions on the spot.

Interview and hire a qualified, commission-free financial advisor. This flies in the face of today’s conventional wisdom, but many people aren’t interested in or suited to investment management. These families can hire an advisor on an ongoing basis. The world has changed and it’s cheaper and easier than ever to find quality help. Many, maybe most families, could be better off with a trusted financial advisor.